China Doubles Yuan Trading Band

China has doubled the allowed limit for the yuan’s movements against the U.S. Dollar by expanding the trading band. A statement released by the People’s Bank of China said it will be able to trade up to two percent, previously one percent, on either side of the daily midpoint rate that is set each morning. The effects will begin Monday.

This backs a promise from China that it would let the market have a greater impact on the economy. Analysts view the change as showing confidence that currency speculators had been incorrect and the economy is stable and can support the promised steps forward. There is still disagreement around Beijing’s attempts to support international usage of the yuan. Some think that this increased volatility may impede its use.

Fu Quing, head of foreign exchange trading at Standard Chartered Bank in Shanghai said it is a “major step towards building more market-oriented exchange rate mechanisms in China,” and that it shows a slow move away from intervention in foreign exchange by the central bank. But Chinese companies will have to learn how to hedge currency risks now with added volatility in the exchange rates. The yuan has often been seen as a one-way appreciation bet by market participants and this is trying to be changed by showing it can be more genuine with fluctuation like other markets.

The People’s Bank of China stated that it will continue keeping stability of the exchange rate and it will be reasonable and balanced. A spokesman also said that China doubling the trading band will improve efficiency of the yuan and give the market a bigger role in allocation of resources.

Though state-owned banks were no longer intervening, foreign exchange traders reported the yuan was falling in recent weeks, staying near the midpoint set by the central bank. Off the record, a senior money manager for a Shanghai international investment fund said that this widened trading back has a high chance of discouraging foreign investors. Some will view it as a good change with increased “money coming in and out.” However, other investors remain skeptical of China and without more transparency it will be seen as bad news. “They don’t look at this as good news they just look at it as more volatility.”

Others see the move as making it more attractive internationally. Increasing the trade range and allowing it to respond more to the market, said Li Huiyong, an analyst at Shenyin Wanguo in Shanghai. Li Heng, economist at Minsheng Securities in Beijing, said that conditions have supported the widened band. Heng added that a one percent fluctuation would not be enough to reflect the markets demand and supply of yuan, which China needs for internationalization.

Around 80 percent of yuan trade settlement transaction is handled in Hong Kong. Beijing aims expanding the currency offshore, and hopes that doubling the trade band will allow more confidence that could lead to yuan being accepted for trade in more businesses beyond China. Yuan is now second, after taking the spot from the Euro, in most popular currencies of trade finance. Beijing needs debt reduced and enough growth for stable employment, but how the yuan band change will affect this is still undetermined. But the news does point to confidence.